The Incredible Shrinking Brokerage List

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Broker lists are getting smaller. As commission rates continue to slide, buyside traders are paring back the number of brokers with whom they trade. The trend promises to drive stock trading into the hands of fewer and fewer very large or very specialized houses.

"With commission rates coming down," says Robert Felvinci, co-head of U.S. growth equity trading at Alliance Capital Management, "the pool of commissions to pay for research and other services is getting smaller."

Broker lists are getting smaller. As commission rates continue to slide, buyside traders are paring back the number of brokers with whom they trade. The trend promises to drive stock trading into the hands of fewer and fewer very large or very specialized houses.

"With commission rates coming down," says Robert Felvinci, co-head of U.S. growth equity trading at Alliance Capital Management, "the pool of commissions to pay for research and other services is getting smaller."

Alliance manages $350 billion in equities with a list of more than 100 brokers. That list has not changed significantly in recent years, but now "everything is under consideration," Felvinci says.

There is little available data to support the anecdotal evidence of shrinking lists, but consultants are making a stab at quantifying the contraction. A Tabb Group survey of 53 buyside traders found that, on average, their firms dropped 3.3 brokers over a recent one-year period. The firms expect to drop another 2.1 brokers, on average, over the next two years.

Shrinkage

Data from Greenwich Associates suggest a stable environment in 2005, but shrinkage in the coming years. The average number of research firms used by money managers rose from 35.6 in 2004 to 36.1 in 2005. The average number of trading firms used by money managers rose from 53.9 in 2004 to 55.7 in 2005.

"It has been pretty stable," notes Greenwich analyst Melissa De Vries, "but, going forward, institutions will be reducing their broker lists. There has been so much commission compression in the business that money managers can afford to have only so many relationships over which they can spread their commissions."

A top executive from a bulge-bracket shop who requested anonymity agrees. Firms have been talking about cutting back on the number of brokers in recent years, he says, but not many have. Now they are.

Commission rates have declined significantly. This year's average rate for NYSE agency trades is expected to be 4.1 cents per share, down from 4.4 cents per share in 2003, according to Greenwich. For Nasdaq trades, the anticipated average is 3.9 cents, compared to 4.1 cents two years ago. The largest and most active money managers those producing more than $50 million in annual equity commissions pay even lower average rates.